Chapter 5.docx

Chapter 5Introduction to Consumer Credit What Is Consumer CreditCreditarrangement to receive cash goods or services now and pay for them in the futurewithout this it would make it impossible for many to buy large ticket items house car etcConsumer credit use of credit for personal needs except a home mortgagemost consumers have three alternatives in financing current purchasesdraw on their savingsuse present earningsborrow against their expected future income to make current credit purchases Uses and Misuses of Creditusing credit to purchase goods and services may be more efficient or productive or to lead more satisfying livesshopaholics and young adults are most vulnerable to misusing creditif you decide to use credit make sure the benefits of making the purchase now increased efficiency or productivity a more satisfying life outweigh the costs financial and psychological of using creditAdvantages of Creditenables people to enjoy goods and services now car home education helps in emergencies and pay for them through payment plans based on future income consumers with previously approved credit may receive other extras advance notice of sales right to order by phone right to buy on approvalmany shoppers believe it is easier to return purchases bought on accountcredit cards provide convenience and efficiency of paying for several purchases with one monthly paymentsafer to use credit since caring large amounts of cash can be dangerouscredit cards are used for identification when cashing cheques and using credit provide you with record of expensesusing credit cards can provide a 30day floatthe lag time between when you make the purchase and when the lender deducts the balance from your chequing account when the payment is duesome large companies Canadian Tire General Motors Corporation issue cobranded affinityvalue added cards or their own Visa or Master Card and offer rebates on purchases gain good credit rating if you repay your debts in timely mannerDisadvantages of Credittemptation to overspend especially during periods of inflation continual overspending can lead to serious troublefailure to repay loan may result in loss of income valuable property and your good reputation and can lead to court action and bankruptcy damage to family relationships and a slowing of progress toward financial goalscredit costs money due to monthly charges and compounding effect of interest on interestTypes of Credittwo types of consumer credit exist1 Consumer loan instalment loan one time loan that borrower repays in specified period of time with predetermined payment scheduleused for specific purpose and involves specified amounthome mortgages automobile loans other consumer instalment loans demand loanwritten agreement or contract lists the repayment terms of consumer loans for each credit purchase number of payments payment amount and whether the loan rate is floating or fixed 2 Revolving credit line of credit in which loans are made on continuous basis and borrower is billed periodically for at least partial paymentlines of creditprearranged loan with bank for maximum specified amoutif line of credit is secured pledged assets against it you will get lower interest usually primeif line of credit is unsecured the interest rate usually prime plus percentageusually used for larger purchases and have lower interest rates than credit cardsHome equity line of creditpersonal line of credit based on current market value of home less amount still owed on the mortgage